Congress Targets Faulty Oil-Drilling Leases Worth Billions in Royalties

When Congress revisits energy legislation next week beginning with a U.S. Senate Energy and Natural Resources Committee hearing, a priority will be to examine the Interior Department's oil and gas royalties program, the panel's new chairman Sen. Jeff Bingaman, (D-N.M.), said Tuesday, according to One issue that has the attention of lawmakers in both parties is the Interior Department’s Minerals Management Service (MMS) failure to include a clause requiring royalty payments in oil-drilling leases signed in 1998 and 1999 by oil companies, an oversight that has cost the government $900 million in lost revenue according to the Wall Street Journal.

House Resources Committee Chairman Nick Rahall, (D-W.Va.) said in December an examination of the entire royalty program would be one of his top priorities.

During the early 1990’s when oil prices were low, the Clinton administration waived royalty payments on initial production but royalties, which range from 12.5 to 16.6 percent generally, were supposed to kick in when oil reached $40 a barrel. The price threshold was omitted by mistake from 1,023 leases issued in 1998 and 1999 by the MMS. Of these, the Journal says, 570 are still in force. Only 45 involve current production or discoveries that promise future production, but C. Stephen Allred, the Interior Department official who oversees the service, says that if amended, these 45 leases could produce $10 to $11 billion of future royalty payments.

In response to critics, the Interior Department announced early this week that it would raise the royalty rate to 16.7 percent from 12.5 percent for oil and gas sales, the New York Times reports, but only on new deepwater leases in the Gulf of Mexico. The change will not affect any of the existing leases.

Last year House Democrats considered banning companies from future exploration if they don’t agree to amend their leases or assessing a “conservation fee” unless the companies agree to amend their lease, the Journal says. They are said to be considering similar measures for legislation this year.

The Interior Department has been trying to renegotiate the flawed leases for the last six months, the Times says, but only five of the companies, including BP PLC have agreed to amend their leases and only for the period beginning October 1, 2006. These companies hold 20 percent of the 45 leases. Chevron, which has not reached agreement with the department, holds another 20 percent. Foreign companies hold 20 percent and small companies hold the rest, the Journal says.

The Interior Department’s “culture” will be the subject of a report by the General Accounting Office to be issued later in the month, the Journal says, that will point to laxity in conducting royalty audits and collecting underpayments from industry.

The department’s Inspector General Earl Devaney will report preliminary findings on the contracts next month that are expected to be cite “bureaucratic bungling” at MMS as the cause of the omission of royalty language in the leases, Reuters says.

Another option Congress is considering is collecting past royalties through legal action and has asked Attorney General Alberto Gonzales if it has the authority to do so.

Stephen Lowey, a White Plains, N.Y., lawyer, argues that because Congress required the leases to have a price threshold, officials at the Interior Department had no authority to leave it out, the Journal says. If that is the case a judge could require companies to pay the royalties, Lowey says.

Lee Fuller, vice president of the Independent Petroleum Association of America, says that going after existing leases would discourage exploration and provoke court challenges, the Journal reports. The companies "didn't negotiate these contracts," he says. "They were handed to them to sign. If it becomes an issue where the nature of the contract itself is affected, then it becomes a lawyers' field day."

Felmy, a spokesman for the American Petroleum Institute says that the leases were signed in good faith, Reuther reports, and if the U.S. government reneged on them foreign governments might impose new terms on their contracts.

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